Wednesday, September 30, 2009

Stock Market Today Analysis

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When you are just starting a stock market investing program, I think it’s a good idea to master what happened in the stock market today and to watch it each and every day. You should do this before you start picking stocks because a lot of the concepts that we are going to review in determining the general market’s direction will apply to our analysis of stocks. Your goal is to figure out whether the market is in an uptrend or a downtrend.

The reason that this is so important to you as an investor is because three out of four stocks will trend with the market. If the market is going up, it will pull the prices of those stocks up as well. If the market is going down, it will pull a stock’s price down. You do not want to fight the general market’s direction because there is a 75% chance that you will lose value. For that reason, invest only when the market’s direction is trending up.

If you have been reading my site, you’ve probably figured out that my approach is developing around the CANSLIM strategy developed by William O’Neil who founded Investor’s Business Daily. I’ve studied his book How To Make Money In Stocks and developed this step by step approach based on what I could understand. While you don’t have to be a subscriber to the IBD, it will certainly help your sense of what today’s stock market did and the overall direction of the stock market.

To refresh our memories, the “general market” refers to the major indexes that summarize the stock markets today. There are four basic ones to focus on. They are:

  1. S&P 500
  2. Dow
  3. NYSE
  4. NASDAQ
To make sense of each of the indexes, there are two basic things that you want to know each day. They are:
  • Did the index go up or down and by how much of a percentage
  • Was volume higher or lower than the previous day
The great news is that finding this information is really easy. You can find it right at investors.com and it’s free even if you are not a subscriber. At the top of the home page of the site, you’ll see today’s market closes for S&P 500, the Dow and the NASDAQ. For the NYSE, you find the volume up there but not the closing prices or the percentage change. You’ll have to dig a little bit for that.

It’s pretty easy to see if the market closed up or down. You can also see what volume did as well. One of the first things that confused me is that when you look at the charts for the S&P 500, the Dow and the NYSE Composite the index prices are compared to overall NYSE composite volume. This is important if you are creating your own stock charts and not using the ones at IBD. NASDAQ volume is used for the NASDAQ chart.

As far as the indexes market value, you’ll want to note did the index value decrease by more than .2%. When determining this you do not want to round. Also, if the index value went up in value, was it by more than 5% of one of the previous distribution days. I’ll come back to that. As far as volume goes, the main thing you are looking for here is this. Was it higher or lower than the day before. In looking at these numbers, you are trying to figure out is the market selling off -- or under distribution. Or, is it in a confirmed uptrend.
What The Data Means For The Stock Market Today

OK. Let’s take a look at the S&P 500. Today, it closed lower at 1057.08. That was down -3.53 points for -.33%. Volume on the NYSE was higher than the day before.

This is an important day for the S&P 500 because:
  • It closed lower
  • It closed lower by more than .2%
  • Volume was higher than the previous day
What actually happened here is what is called a distribution day. A distribution day is when one of the major stock indexes falls by more than .2% on higher volume (and you do not round the percentage up). It indicates that institutions are selling their positions which makes prices fall. If the stock market is in a confirmed uptrend, a day of distribution doesn’t necessarily mean the uptrend is over. But, you do need to keep track of the number of distribution days each index experiences. Once you reach four or five distribution days in the last four or five weeks, it’s time to sell and get your money into cash.

That being said, a distribution day doesn’t stay with the market forever. It can expire after four or five weeks OR if the market index climbs significantly above the distribution days close by 5% or so. Either of those situations would clear a distribution day off the list.

Today, the Nasdaq also fell, but it was by less than .2% so it didn’t count but the Dow and NYSE Composite all chocked up a distribution day.

Each day, you want to look at the market and determine what happened. The best place to start is by identifying when selling is taking place. I’ll talk about how to tell if the market is rallying in later posts. For now, though, I want you to consider putting together a list of steps that you’ll take each day. Here is what I did to figure out what happened today.
  1. Check each major index’s close
  2. What was the percentage change?
  3. Was volume higher or lower?
  4. Watch the daily market wrap on IBD TV (free to nonsubscribers)
  5. Read the big picture column and the market pulse
  6. Check the general markets page in today’s IBD.
As an aide, I have put together a spreadsheet to start monitoring the stock market today news with, and as I get it smoothed out, I'll make it available.

In the meantime, get in the habit of checking the stock market today and every day to figure out what it means to you as an investor.

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